Chapter 14 - Short Term Trading : Introduction
Having discussed mainly about stock investments from a long term perspective, it might now be relevant to discuss about short-term trading. This is not to prepare ourselves to initiate short-term as a core investment strategy but to have an overall idea about what short-term trading is all about. Different skills are needed for short-term and long-term investing, and both have their challenges. At the outset, stock investment can be classified as short-term and long-term. But to be more precise, stock market trading generally can be classified into day trading, swing trading and position trading. Let us briefly discuss about them.
Also known as ‘intraday’, the positions are usually entered and exited from within the same trading day. Intraday traders, in general, are interested in quicker, smaller amounts and making multiple trades per day. As such, the risks associated with intraday are also more.
Swing trading is typically a short to intermediate term trend following system. When market trend swings from one direction to another the swing trader follows that movement adjusting positions to take advantage of the ‘swing’. Traders who swing trade typically look for trend reversals and retracements for their entry/exit points.
Position trading, also known as ‘trend trading’ can best be described as a ‘buy and hold’ method. They hold on to the position during periods of minor retracement with the expectation that they will eventually continue ‘trending’ in the desired direction. Since position trading and swing trading are for longer durations of time, we can call day trading as purely a short-term trading strategy.